CUSTOM TRUCK ONE SOURCE, INC. Throughout this section, unless otherwise noted "we," "us," "our," "Company," or "Nesco" refers toNesco Holdings, Inc. and its consolidated subsidiaries. The information provided below supplements, but does not form part of, our financial statements. This discussion contains forward-looking statements that are based on the views and beliefs of Nesco's management, as well as assumptions and estimates made by our management. Actual results could differ materially from such forward-looking statements as a result of various risk factors, including those that may not be in the control of management. For further information on items that could impact our future operating performance or financial condition, see the section entitled "Risk Factors" and in our Annual Report on Form 10-K, filed with theSEC onMarch 16, 2020 , and our Quarterly Report filed with theSEC onMay 7, 2020 . Overview of Markets and Related Industry Performance The global and North American economies continue to face unprecedented uncertainty arising from the COVID-19 pandemic. The pandemic has necessitated governmental authorities, institutions and communities to take extraordinary actions. Nesco serves critical infrastructure sectors that have been identified by the by theUnited States Cybersecurity and Infrastructure Security Agency ("CISA") as vital to theU.S. Accordingly, we have continued to meet the needs of our customers during the pandemic. We have also undertaken efforts intended to maintain the health and safety of our employees and their families, as well as our customers, vendors and communities. While Nesco's business is considered critical and while we delivered year-on-year increases in revenue and cash from operating activities during the second quarter of 2020 compared with the same period in 2019, we are unable to predict the impact that COVID-19 will have on our financial position and operating results due to ongoing uncertainties. Government and business mitigation efforts have varied from region to region as circumstances have unfolded at local levels. Some of our customers continue to delay projects, to defer capital equipment purchases and to minimize in-person sales meetings. As a result, our business has been and will continue to be adversely impacted by the pandemic. The combination of our financial position, our available liquidity, the flexibility to reduce capital spending provided by our young fleet age and the critical nature of our end markets should help to lessen the impacts of COVID-19 on our financial performance. Should a prolonged downturn eventuate, sustained adverse impacts may affect our future valuation of certain assets and therefore may increase the likelihood of an impairment charge, write-off, or reserve associated with such assets, including goodwill, intangible assets, rental and property and equipment, inventories, accounts receivable and other assets. Since the pandemic began, management has been focused on delivering for our customers and managing our costs and cash flows while preparing for a future recovery. We have reduced our capital spending, our working capital balances and undertaken cost reduction efforts including limited headcount reductions. At the same time, we have continued to make opportunistic investments in fleet, systems and personnel to position us for long-term growth. We are continually monitoring the markets in which we operate and will take additional measures we believe are appropriate as the situation continues to develop. Starting in March, we saw a decline in demand from electric distribution customers in population centers where projects were delayed by efforts to promote social distancing. Electric distribution projects seem to have since stabilized. Electric transmission projects were more stable during the early part of the pandemic but experienced a normal seasonal summer slowdown starting in June. Electric distribution and transmission customers continue to have large backlogs of projects that must be undertaken to reduce fire hazards, to ensure the uninterrupted supply of electricity and to meet growing electricity demands of the future tied to increased household usages and vehicle electrification. We have experienced relative stability in the rail and telecom sectors. Telecom end-customers have announced intentions to continue to invest in 5G infrastructure and additional network enhancements designed to address deficiencies that became apparent with increased traffic during pandemic stay-at-home orders. 21 -------------------------------------------------------------------------------- FINANCIAL OVERVIEW We use a variety of operational and financial metrics, including non-GAAP financial measures, such as Adjusted EBITDA, to enable us to analyze our performance and financial condition. We utilize these financial measures to manage our business on a day-to-day basis and believe that they are the most relevant measures of performance. Some of these measures are commonly used in our industry to evaluate performance. We believe these non-GAAP measures provide expanded insight to assess performance, in addition to the standard GAAP-based financial measures. There are no specific rules or regulations for determining non-GAAP measures, and as such, our non-GAAP financial measures may not be comparable to measures used by other companies within the industry. The presentation of non-GAAP financial information should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. You should read this discussion and analysis of our results of operations and financial condition together with the consolidated financial statements and the related notes thereto also included within. Measures Related to our Fleet We consider the following key operational measures when evaluating our performance and making day-to-day operating decisions: Equipment on rent - Equipment on rent is the original equipment cost ("OEC") of units rented to customers at a given point in time. Average equipment on rent is calculated as the weighted-average equipment on rent during the stated period. OEC represents the original equipment cost, exclusive of the effect of adjustments to rental equipment fleet acquired in business combinations. This adjusted measure of OEC is used by our creditors pursuant to our credit agreements, wherein this is a component of the basis for determining compliance with our financial loan covenants. Additionally, the pricing of our rental contracts and equipment sales prices for our equipment is based upon OEC, and we measure a rate of return from our rentals and sales using OEC. OEC is a widely used industry metric to compare fleet dollar value independent of depreciation. Fleet count - Fleet count represents the average or period end (defined as either) equipment units held in our rental fleet over any period. Fleet utilization - Fleet utilization, with respect to the average equipment units held in our rental fleet over any period, is defined as the total number of days the rental equipment was rented during the period divided by the total number of days such rental equipment could have been rented during the same period, assuming that each piece of equipment could have been rented every day in the period (i.e. no maintenance or planned downtime is included in the calculation). Rental rate per day - Rental rate per day for the period is calculated as total rental revenue excluding freight and billings to customers for damaged equipment divided by the total billed rental days. Fleet age - Fleet age represents the number of years from the manufacturer chassis year of the rental equipment unit through the current year end. We evaluate fleet age for each equipment type and our fleet as a whole. In order to calculate average fleet age by type and average total fleet age, we weight the fleet age by the number of units within the relevant group. Gross Profit, Income from Operations and Cash Flow from Operations Gross profit, income from operations and cash flow from operations are financial performance measures that we use to monitor our results from operations and to measure our performance against our debt covenants. Adjusted EBITDA Adjusted EBITDA is also a financial performance measure that we use to monitor our results from operations, to measure our performance against our debt covenants and in measuring our performance relative to that of our competitors. We believe the presentation of Adjusted EBITDA enhances an investor's understanding of our financial performance because it is a useful financial metric to assess our operating performance from period to period by excluding certain items that we believe are not representative of our core business. Such items are excluded pursuant to the definition of Adjusted EBITDA in the 2019 Credit Facility and the Indenture, Adjusted EBITDA is the basis for several financial loan covenants contained in the 2019 Credit Facility. We believe that Adjusted EBITDA provides investors with a useful tool for assessing the comparability between periods of our ability to generate cash from operations sufficient to pay taxes, service debt and undertake capital expenditures. We use these financial measures for business planning purposes, for loan compliance purposes, and in measuring our performance relative to that of our competitors. 22 -------------------------------------------------------------------------------- Our use of the terms EBITDA and Adjusted EBITDA may vary from that of others in its industry and therefore are limited in their usefulness as comparative measures. These financial measures should not be considered as alternatives to net income (loss), operating income (loss) or any other performance measures derived in accordance with GAAP as measures of operating performance, operating cash flows or as measures of liquidity. Non-GAAP financial measures should not be relied upon to the exclusion ofU.S. GAAP financial measures. We encourage investors to review our non-GAAP financial measures together with ourU.S. GAAP results and historical consolidated financial statements, and not in isolation. Other companies may use similarly titled non-GAAP financial measures that are calculated differently from the way we calculate such measures. Accordingly, our non-GAAP financial measures may not be comparable to similar measures used by other companies. Adjusted EBITDA includes an adjustment to exclude the effects of purchase accounting adjustments when calculating the cost of used equipment sold. When equipment is purchased in connection with a business combination, the equipment is revalued to its then current fair value for accounting purposes. The consideration transferred (i.e., the purchase price) in a business combination is allocated to the fair value of equipment as of the acquisition date, with depreciation recorded thereafter following our accounting policies; however, this may not be indicative of our actual cost to acquire new equipment that we add to our fleet apart from a business acquisition. Additionally, the pricing of our rental contracts and equipment sales prices for our equipment is based upon OEC, and we measure a rate of return from our rentals and sales using OEC. As indicated above, the agreements governing our indebtedness define this adjustment to EBITDA, as such, and we believe this metric is a better indication of our true cost of equipment sales due to the removal of the purchase accounting adjustments. Consolidated Operating Results Three and Six Months EndedJune 30, 2020 and 2019 Three Months Three Months Ended Ended June 30, Six Months Ended Six Months Ended (in $000s) June 30, 2020 % of revenue 2019 % of revenue June 30, 2020 % of revenue June 30, 2019 % of revenue Rental revenue$ 46,984 68.6%$ 48,125 76.6%$ 97,978 65.2%$ 93,767 75.4% Sales of rental equipment 4,982 7.3% 4,332 6.9% 14,075 9.4% 11,731 9.4% Sales of new equipment 5,418 7.9% 4,480 7.1% 12,995 8.7% 6,830 5.5% Parts sales and services 11,097 16.2% 5,918 9.4% 25,176 16.8% 12,019 9.7% Total Revenue 68,481 100.0% 62,855 100.0% 150,224 100.0% 124,347 100.0% Cost of revenue 32,443 47.4% 25,266 40.2% 72,671 48.4% 49,675 39.9% Depreciation of rental equipment 19,696 28.8% 16,944 27.0% 39,808 26.5% 33,675 27.1% Gross Profit 16,342 23.9% 20,645 32.8% 37,745 25.1% 40,997 33.0% Operating expenses 13,823 10,825 28,430 22,487 Operating Income 2,519 9,820 9,315 18,510 Other Expense 16,732 14,841 38,767 29,821 Loss Before Income Taxes (14,213) (5,021) (29,452) (11,311) Income Tax Expense (Benefit) (1,063) 402 (333) 836 Net Loss$ (13,150) $ (5,423) $ (29,119) $ (12,147) Total Revenue. Total revenue for the second quarter 2020, increased by$5.6 million , or 9.0%, compared to the second quarter 2019. Rental revenue decreased$1.1 million , or 2.4%, compared to the same period in 2019. This was primarily a result of units coming off rent and lack of new project starts as customers delayed projects in response to COVID-19. This led to a decrease in average equipment on rent to$461.1 million in the current quarter from$464.7 million in the same quarter of 2019. Sales of rental equipment, which can vary from quarter to quarter, increased$0.7 million , or 15.0%, and sales of new equipment increased$0.9 million , or 20.9%, compared to the same period in 2019. Parts sales and service revenue increased$5.2 million , or 87.5%, compared to the same period in 2019 primarily due to the acquisition ofTruck Utilities . Total revenue for the six months endedJune 30, 2020 , increased by$25.9 million , or 20.8%, compared to the same period in 2019. Rental revenue increased$4.2 million , or 4.5%, compared to the same period in 2019 driven by investments made in 2019 and partially offset by delays in projects resulting from the COVID-19 pandemic in the second quarter. Sales of rental equipment increased$2.3 million , or 20.0%, and sales of new equipment increased$6.2 million , or 90.3%, compared to the same period in 2019. Parts sales and service revenue increased$13.2 million , or 109.5%, compared to the same period in 2019 primarily due to the acquisition ofTruck Utilities . 23 -------------------------------------------------------------------------------- Cost of Revenue. Cost of revenue, excluding depreciation of$19.7 million , for the three months endedJune 30, 2020 , increased by$7.2 million , or 28.4%, compared to the same period in 2019 ($9.9 million , or 23.5%, including depreciation). Cost of revenue, excluding depreciation of$39.8 million , for the six months endedJune 30, 2020 , increased by$23.0 million , or 46.3%, compared to the same period in 2019 ($29.1 million , or 34.9%, including depreciation). The vast majority of the increase in cost of revenue for both the three and six months endedJune 30, 2020 is due to the costs related to increases in parts sales and service revenue and in equipment sales revenue. Operating Expenses. Operating expenses for the three and six months endedJune 30, 2020 increased$3.0 million , or 27.7%, and$5.9 million , or 26.4%, respectively, compared to the same periods in 2019. The increase is primarily due to increased selling, general and administrative expenses as a result of increased headcount with the expansion of the organization and additional expenses incurred as a result of being a public company. Offsetting this increase is a reduction in transaction expenses of$1.3 million ($3.1 million for the six month period endedJune 30, 2020 ) compared to the same period in 2019, which were directly related to the merger withCapitol in 2019. Other Expense. Other expense for the three and six months endedJune 30, 2020 increased$1.9 million , or 12.7%, and$8.9 million , or 30.0%, respectively, compared to the same periods in 2019. This is primarily a result of the changes in fair value of an interest rate collar, which is an undesignated hedging instrument. The resulting expense in the current quarter related to the collar was approximately$0.8 million ($6.8 million for the six month period endedJune 30, 2020 ). In addition, net interest expense in the current quarter increased by$1.1 million . Income Tax Expense. Income tax expense was a benefit of$1.1 million and$0.3 million for the three and six months endedJune 30, 2020 , respectively. This is due to our recovery of taxes paid in prior years as a result of the United States CARES Act that was enacted inMarch 2020 . Financial Performance We believe that our operating model, together with our highly variable cost structure, enables us to sustain high margins, strong cash flow generation and stable financial performance throughout various economic cycles. We are able to generate substantial free cash flow through our earnings, as well as sales of used equipment. Our highly variable cost structure adjusts with the utilization of our equipment, thereby reducing our costs to match our revenue. We principally evaluate financial performance based on five measurements: Adjusted EBITDA, fleet count, fleet utilization, equipment dollars ("OEC") on rent and rental rate per day. The following table summarizes these operating metrics. The presentation of non-GAAP financial information should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. 24 --------------------------------------------------------------------------------
Financial performance for the three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
(in $000s, except fleet
count and rate per day) 2020 2019 change (%) 2020 2019 change (%)
Adjusted EBITDA (a) $26,168 $30,477 $(4,309) (14.1) $58,229 $60,911 $(2,682) (4.4)
Average equipment on rent
(b) $461,100 $464,700 $(3,600) (0.8) $480,400 $458,400 $22,000 4.8
Average fleet count 4,615 4,086 529 12.9 4,621 4,000 621 15.5
Average fleet utilization
(c) 71.3% 80.2% (8.9)% (11.1) 73.6% 81.1% (7.5)% (9.2)
Average rental rate per
day (d) $136.71 $136.67 $0.04 - $137.26 $137.06 $0.20 0.1
(a) EBITDA represents net income (loss) before interest, provision for income
taxes, depreciation, and amortization. Adjusted EBITDA is defined as EBITDA as
further adjusted for (1) non-cash purchase accounting impact, (2) transaction
and process improvement costs, including the effect of the cessation of
operations in Mexico , (3) major repairs, (4) share-based payments, and (5) the
change in fair value of derivative instruments. These metrics are subject to
certain limitations. See "Financial Overview-Adjusted EBITDA" and the
reconciliation of Adjusted EBITDA to U.S. GAAP net income (loss) below.
(b) Average equipment on rent is the average original equipment cost of units on
rent during the period. The measure provides a value dimension to the fleet
utilization statistics. This metric has been adjusted to exclude Mexico , which
the Company commenced exit activities in the third quarter of 2019.
(c) Average fleet utilization for the period is calculated as the total number
of invoiced days divided by the total number of available equipment days. This
metric has been adjusted to exclude Mexico , which the Company commenced exit
activities in the third quarter of 2019.
(d) Average rental rate per day for the period is calculated as total rental
revenue excluding freight and damaged billings divided by the total rental days,
which represents the number of billable days in the period aggregated across all
units in the fleet. This metric has been adjusted to exclude Mexico , which the
Company commenced exit activities in the third quarter of 2019.
Adjusted EBITDA. Adjusted EBITDA decreased $4.3 million , or 14.1%, to $26.2
million for the three months ended June 30, 2020 compared to the same period in
2019. This decrease can be attributed to a combination of a $1.6 million decline
in gross profit, excluding depreciation of $19.7 million , as well as the
aforementioned increase in operating expenses.
Adjusted EBITDA decreased $2.7 million , or 4.4%, to $58.2 million for the six
months ended June 30, 2020 compared to the same period in 2019. This decrease is
primarily due to the aforementioned increase in operating expenses, offset by a
$2.9 million increase in gross profit, excluding depreciation of $39.8 million .
The following is a reconciliation from
Six Months Ended June
Three Months Ended June 30, 30,
(in $000s) 2020 2019 2020 2019
Net loss $ (13,150) $ (5,423) $ (29,119) $ (12,147)
Interest expense 15,949 14,850 31,963 29,843
Income tax expense (benefit) (1,063) 402 (333) 836
Depreciation expense 19,992 17,180 40,369 34,176
Amortization expense 771 724 1,462 1,448
EBITDA 22,499 27,733 44,342 54,156
Adjustments:
Non-cash purchase accounting impact
(1) 178 125 1,095 736
Transaction and process improvement
costs (2) 1,639 2,183 3,718 4,693
Major repairs (3) 595 384 1,295 1,146
Share-based payments (4) 453 52 1,012 180
Change in fair value of derivative
(5) 804 - 6,767 -
Adjusted EBITDA $ 26,168 $ 30,477 $ 58,229 $ 60,911
25--------------------------------------------------------------------------------
The following is a reconciliation from Adjusted EBITDA to net cash flow from
operating activities for the six months ended
Six Months Ended June 30,
(in $000s) 2020 2019
Adjusted EBITDA $ 58,229 $ 60,911
Adjustments:
Change in fair value of derivative (5) (6,767) -
Share-based payments (4) (1,012) (180)
Major repairs (3) (1,295) (1,146)
Transaction and process improvement costs (2) (3,718) (4,693)
Non-cash purchase accounting impact (1) (1,095) (736) EBITDA 44,342 54,156 Add: Interest expense (31,963) (29,843) Income tax benefit (expense) 333
(836)
Amortization - financing costs 1,515
1,380
Share-based payments 1,012
180
Loss (gain) on sale of rental equipment and parts (3,838)
(3,260)
Gain on insurance proceeds - damaged equipment (233) (387) Major repair disposal 1,295 1,146 Change in fair value of derivative 6,767
-
Deferred tax (benefit) expense 979
544
Provision for losses on accounts receivable 1,421
1,112
Changes in assets and liabilities: Accounts receivable 10,935 (13,357) Inventory (4,313) (8,864) Prepaid expenses and other (152) (2,412) Accounts payable (6,988) 8,020 Accrued expenses (385) (683) Deferred rental income (1,058) (1,719) Net cash flow from operating activities$ 19,669
Notes to EBITDA and Adjusted EBITDA reconciliations: (1) Represents the non-cash impact of purchase accounting, net of accumulated depreciation, on the cost of equipment sold. The equipment acquired received a purchase step-up in basis, which is a non-cash adjustment to the equipment cost pursuant to our credit agreement. (2) 2020: Represents transaction costs related to Nesco's acquisition ofTruck Utilities (which include post-acquisition integration expenses incurred during the current quarterly and six month periods); 2019: Represents transaction expenses related to merger activities associated with the transaction withCapitol that was consummated onJuly 31, 2019 . These expenses are comprised of professional consultancy, legal, tax and accounting fees. Also included are costs of startup activities (which include training, travel, and process setup costs) associated with the rollout of new PTA locations that occurred throughout the prior year into the current periods. Finally, the expenses associated with the Company's closure of its Mexican operations, which closure activities commenced in the third quarter of 2019, are included for the current quarterly and six month periods. Pursuant to Nesco's credit agreement, the cost of undertakings to affect such cost savings, operating expense reductions and other synergies, as well as any expenses incurred in connection with acquisitions, are amounts to be included in the calculation of Adjusted EBITDA. (3) Represents the undepreciated cost of replaced vehicle chassis and components from heavy maintenance, repair and overhaul activities associated with our fleet, which is an adjustment pursuant to our credit agreement. (4) Represents non-cash stock compensation expense associated with the issuance of stock options and restricted stock units. (5) Represents the charge to earnings for our interest rate collar (which is an undesignated hedge) in the three and six months endedJune 30, 2020 . 26 -------------------------------------------------------------------------------- Equipment on Rent. Average equipment on rent was$461.1 million for the three months endedJune 30, 2020 , a decrease of$3.6 million or 0.8% over the same period in 2019. The decrease is primarily due to COVID-19 related customer project delays. Average equipment on rent for the six months endedJune 20, 2020 was$480.4 million up from$458.4 million for the same period in 2019. The increase is due to fleet investments made in 2019 and continued demand from customers during the first quarter, offset by project delays related to COVID-19 in the second quarter. Fleet Count. Average fleet count was 4,615 for the three months endedJune 30, 2020 , an increase of 529 units from an average fleet count of 4,086 over the same period in 2019. Average fleet count for the six months endedJune 30, 2020 was 4,621, an increase of 621 from an average fleet count of 4,000 over the same period in 2019. Bucket trucks represented the largest category of our year over year capital expenditures for the three and six months endedJune 30, 2020 , driven by strong demand in 2019 and the first quarter of 2020 that has been offset by project delays resulting from the COVID-19 pandemic. Fleet Utilization. Fleet utilization was 71.3% for the three months endedJune 30, 2020 , compared to 80.2% the same period of 2019. Fleet utilization was 73.6% for the six months endedJune 30, 2020 , compared to 81.1% the same period of 2019. The decrease in both periods is primarily due to COVID-19 related customer project delays. Rental Rate Per Day. Average rental rate per day was$136.71 for the three months endedJune 30, 2020 , a slight increase from$136.67 for the same period in 2019. Average rental rate per day was$137.26 for the six months endedJune 30, 2020 , a 0.1% increase from$137.06 for the same period in 2019. Consolidated rate remained steady year over year. Fleet Age. We use fleet age by type to assist in our decision to sell and purchase a particular fleet category to ensure our fleet age remains competitive. Our overall average fleet age was 3.7 as ofJune 30, 2020 , compared to 3.7 years atJune 30, 2019 . We believe the current age of our fleet is young and gives us flexibility from a capital allocation and sales perspective. Fleet Composition. We own a diverse selection of equipment in order to meet the needs of our customers. Bucket trucks, digger derricks, line equipment and rail-mounted equipment make up a significant percentage of our fleet portfolio. We also carry cranes, pressure diggers, underground equipment, and other miscellaneous fleet items, making us a full service specialty equipment provider. All of our equipment is available for rent and our used equipment sales and new equipment purchases are partially driven by our desire to keep an optimal product mix and maintain a competitive fleet age. The OEC of our ERS fleet was$640.4 million as ofJune 30, 2020 , a$3.1 million , or 0.5%, increase from$637.3 million atDecember 31, 2019 . 27 -------------------------------------------------------------------------------- Operating Results by Segment - Three and Six Months EndedJune 30, 2020 and 2019 The Company manages its operations through two business segments: rental and sale of fleet and equipment along with repair and maintenance related to those assets (ERS), and the rental and sale of parts, tools, and accessories (PTA). See Note 3, Segments, to our unaudited condensed consolidated financial statements for additional information. Equipment Rental and Sales Segment Three Months Ended June 30, Six Months Ended June 30, (in $000s) 2020 2019 $ change % change 2020 2019 $ change % change Rental revenue$ 43,025 $ 44,867 $ (1,842) (4.1) %$ 90,078 $ 87,762 $ 2,316 2.6 % Sales of rental equipment 4,982 4,332 650 15.0 % 14,075 11,731 2,344 20.0 % Sales of new equipment 5,418 4,480 938 20.9 % 12,995 6,830 6,165 90.3 % Total revenues 53,425 53,679 (254) (0.5) % 117,148 106,323 10,825 10.2 % Cost of revenue 21,549 19,561 1,988 10.2 % 48,869 38,215 10,654 27.9 % Depreciation of rental equipment 18,559 15,889 2,670 16.8 % 37,535 31,550 5,985 19.0 % Gross Profit$ 13,317 $ 18,229 $ (4,912) (26.9) %$ 30,744 $ 36,558 $ (5,814) (15.9) % Total Revenues. Revenue in our ERS segment represented 78.0%. and 85.4% of our consolidated revenues for the three months endedJune 30, 2020 and 2019, respectively. ERS segment revenue decreased by$0.3 million for the three months endedJune 30, 2020 compared to the same period in 2019. Rental revenue decreased$1.8 million primarily as a result of COVID-19 project delays. Sales of rental and new equipment, which can vary from quarter to quarter, increased$1.6 million . ERS segment revenue increased by$10.8 million or 10.2%, for the six months endedJune 30, 2020 compared to the same period last year. Rental revenue increased by$2.3 million over the prior period driven by end-market demand in the first quarter and offset by pandemic-related project delays in the second quarter. New equipment sales increased by$6.2 million , or 90.3%, compared to the same period in 2019. Used equipment sales increased by$2.3 million due in part to dispose of aged units. Cost of Revenue. The$2.0 million increase in cost of revenue for the three months endedJune 30, 2020 compared to the prior year is primarily due to increased service costs on units coming off rent as well as costs related to increased sales of rental and new equipment. Cost of revenue increased by$10.7 million year over year for the six months endingJune 30, 2020 , primarily due to a$7.4 million increase in cost of sales of new and rental equipment. Depreciation. Depreciation of our rental fleet increased by$2.7 million and$6.0 million for the three and six months endedJune 30, 2020 , compared to the same periods in 2019, primarily due to growth in fleet count. Gross Profit. Gross profit for the three months endedJune 30, 2020 , excluding depreciation of$18.6 million , decreased by$2.2 million compared to the same period in 2019 due primarily to a reduction in high margin rental revenue. Gross profit for the six months endingJune 30, 2020 , excluding depreciation of$37.5 million decreased by$0.2 million in the first half of 2020 compared to the first half of 2019. 28
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Parts, Tools, and Accessories Segment
Three Months Ended June 30, Six Months Ended June 30,
(in $000s) 2020 2019 $ change % change 2020 2019 $ change % change
Rental revenue $ 3,959 $ 3,258 $ 701 21.5 % $ 7,900 $ 6,005 $ 1,895 31.6 %
Parts sales and services 11,097 5,918 5,179 87.5 % 25,176 12,019 13,157 109.5 %
Total revenues 15,056 9,176 5,880 64.1 % 33,076 18,024 15,052 83.5 %
Cost of revenue 10,894 5,705 5,189 91.0 % 23,802 11,460 12,342 107.7 %
Depreciation of rental
equipment 1,137 1,055 82 7.8 % 2,273 2,125 148 7.0 %
Gross Profit $ 3,025 $ 2,416 $ 609 25.2 % $ 7,001 $ 4,439 $ 2,562 57.7 %
Total Revenues. PTA segment revenue increased $5.9 million or 64.1% for the
three months ended June 30, 2020 compared to same period in 2019. For the six
months ended June 30, 2020 PTA segment revenue increased by $15.1 million , or
83.5%. The increase in revenue is primarily due to the acquisition of Truck
Utilities . The PTA segment would have grown more but experienced headwinds from
COVID-19 social distancing measures in the last part of the first quarter and
throughout the second quarter as a result of new project delays.
Cost of Revenue. Cost of revenue in the PTA segment increased $5.3 million and
$12.5 million for the three and six months ended June 30, 2020 , respectively. as
a direct result of the increase in parts sales volume, as well as the expansion
of operations from two PTA locations to seven over the course of 2019 with an
eighth location partially opening during the second quarter of 2020.
Gross Profit. PTA gross profit, excluding $1.1 million of depreciation,
increased $0.7 million , or 19.9%, and $2.7 million , or 41.3%, for the three and
six months ended June 30, 2020 , respectively, compared to the same periods in
2019. The increase in gross profit is driven by higher revenue in the segment,
offset by a mix shift to lower margin parts sales and service revenue.
29
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Liquidity and Capital Resources
Historical Liquidity
Our principal sources of liquidity include cash generated by operating
activities and borrowings under our 2019 Credit Facility. We believe that our
liquidity sources and operating cash flows are sufficient to address our
operating, debt service and capital requirements over the next twelve months,
however, we are continuing to monitor the impact of COVID-19 on our business and
the financial markets. We have proactively reduced our planned 2020 net capital
expenditures (which we define to be purchases of rental and other property and
equipment, net of proceeds from disposals of such assets) to help manage
liquidity and optimize utilization. As of June 30, 2020 , we had $5.3 million in
cash compared to $6.3 million as of December 31, 2019 . As of June 30, 2020 , we
had $268.5 million of outstanding borrowings under our 2019 Credit Facility with
an additional $78.3 million in availability (subject to a borrowing base)
compared to $250.0 million of outstanding borrowing under the 2019 Credit
Facility as of December 31, 2019 .
2019 Credit Facility
On July 31, 2019 , we entered into the 2019 Credit Facility, which provides us
with $350.0 million in aggregate principal amount of commitments pursuant to a
first lien senior secured asset based revolving credit facility. On March 10,
2020 , we entered into an agreement (the "Incremental Agreement") that amended
the syndicate of banks for a new participant that increased the maximum amount
of the 2019 Credit Facility by $35.0 million to a total of $385.0 million .
The new 2019 Credit Facility has a five-year term and a floating rate of
interest based on either the federal funds rate plus a margin ranging between 50
and 100 basis points or LIBOR plus a margin ranging between 150 and 200 basis
points, in each case, depending on excess availability under the facility. Our
availability under the 2019 Credit Facility is a percentage of the value of our
accounts receivable, our parts inventory, our fleet inventory, and our cash, in
each case, subject to certain eligibility criteria and periodic collateral
evaluations. A portion of the 2019 Credit Facility may be used for the issuance
of letters of credit. The 2019 Credit Facility is guaranteed by our wholly owned
domestic subsidiaries, subject to customary exceptions, and is secured by
substantially all of our assets and the guarantors. We can reduce the aggregate
commitments under the 2019 Credit Facility without premium or penalty. The 2019
Credit Facility contains covenants which, among other things, limit the
occurrence of additional indebtedness (including acquired indebtedness),
issuance of certain preferred stock, the payment of dividends, making restricted
payments and investments, the purchase or acquisition or retirement for value of
any equity interests, the provision of loans or advances to restricted
subsidiaries, the sale or lease or transfer of any properties to any restricted
subsidiaries, the transfer or sale of assets, and the creation of certain liens.
In addition, the 2019 Credit Facility requires the Company to comply with a
financial maintenance covenant requiring the Company and its restricted
subsidiaries to maintain a fixed charge coverage ratio of at least 1.00;
provided that this covenant shall only be tested if availability under the 2019
Credit Facility is less than the greater of (i) 10% of the Line Cap and (ii) $30
million , and shall be tested until availability is no longer less than such
amounts for 20 consecutive calendar days.
Senior Secured Notes due 2024
In connection with the closing of the merger and related transactions, on July
31, 2019 we completed a private offering for Senior Secured Second Lien Notes
due 2024 (the "Senior Secured Notes") issued by Capitol Investment Merger Sub 2,
LLC, our wholly owned and indirect subsidiary (the "Issuer"). The aggregate
principal amount of the Senior Secured Notes was $475.0 million . The Senior
Secured Notes bear interest at a rate of 10.0% per annum payable semi-annually,
in cash in arrears, on February 1 and August 1 of each year, commencing on
February 1, 2020 . The Senior Secured Notes do not have registration rights.
A summary of the key provisions are as follows:
Guarantors - The Senior Secured Notes are guaranteed (the "Guarantees") by
Capitol Intermediate Holdings, LLC , our wholly owned subsidiary ("Holdings") and
the wholly owned domestic subsidiaries of the Issuer (together, "Guarantors")
that guarantee obligations under the 2019 Credit Facility or any future debt of
Nesco or any other Guarantors.
Security - The Senior Secured Notes and the Guarantees are secured on a
second-priority basis by all of our assets and the Guarantors that secure our
obligations under the 2019 Credit Facility.
Ranking - The Senior Secured Notes and the Guarantees are general senior secured
obligations. The Senior Secured Notes rank equally in right of payment with all
of our existing and future senior debt and rank senior in right of payment to
all of our future subordinated obligations. The Guarantees rank equally in right
of payment with all of the Guarantors' existing and future senior obligations
and rank senior in right of payment to all of the Guarantors' existing and
future subordinated obligations. The Senior Secured Notes and the Guarantees
rank effectively subordinated to all of the Guarantors' and our first-priority
secured debt, including borrowings under the 2019 Credit Facility.
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Redemption and Repurchase - The Senior Secured Notes are redeemable, in whole or in part, at any time on or after the Closing Date at specified redemption prices. At any time prior toAugust 1, 2021 , we may redeem all or part of the notes at a redemption price equal to 100.0% of the principal amount, plus an applicable premium, plus accrued and unpaid interest, if any, to the redemption date. We may also redeem some or all of the notes: fromAugust 1, 2021 , but beforeJuly 31, 2022 , at a redemption price of 105.0% of the principal amount plus accrued and unpaid interest, if any, to the redemption date; fromAugust 1, 2022 , but beforeJuly 31, 2023 , at a redemption price of 102.5% of the principal amount plus accrued and unpaid interest, if any, to the redemption date; and afterAugust 1, 2023 , at a redemption price of 100.0% of the principal amount plus accrued and unpaid interest, if any, to the redemption date. In addition, we may redeem up to 40.0% of the Senior Secured Notes untilAugust 1, 2021 , at a redemption price of 110.0% of the principal amount plus accrued and unpaid interest, if any, to the redemption date, with the net cash proceeds from one or more equity offerings. In addition, we may be required to make an offer to purchase the Senior Secured Notes upon the sale of certain assets and upon a change of control. Covenants - The Senior Secured Notes contain various restrictive covenants. As ofJune 30, 2020 , we were in compliance with all of the covenants and other provisions of the 2019 Credit Facility and the indenture governing the Senior Secured Notes disclosed above. Any failure to be in compliance with any material provision or covenant of these agreements could have a material adverse effect on our liquidity and operations. Due to the condition and relatively young age of our fleet, we have the ability to significantly reduce or suspend capital expenditures during difficult economic times, to generate additional cash flow during these periods. We believe that cash generated by our rental operations and cash received from the sale of equipment, as well as funds available under the 2019 Credit Facility will be adequate to meet our operating, investing and financing needs for the foreseeable future. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds. Our ability to meet our operating, investing and financing needs depends to a significant extent on our future financial performance, which will be subject in part to general economic, competitive, financial, regulatory and other factors that are beyond our control. In addition to these general economic and industry factors, the principal factors in determining whether our cash flows will be sufficient to meet our liquidity requirements will be changes in governmental regulations for the electric utility transmission and distribution industry, weather, and our customers' ability to secure materials. In the event that we need access to additional cash, we may not be able to access the credit markets on commercially acceptable terms or at all. We expect to continually assess our performance, the economic environment and market conditions to guide our decisions regarding our uses of cash, including capital expenditures. We may, from time to time, refinance, reprice, extend, retire or otherwise modify our outstanding debt to lower our interest payments, reduce our debt or otherwise improve our financial position. These actions may include repricing amendments, extensions, and/or opportunistic refinancing of debt. The amount of debt that may be refinanced, re-priced, extended, retired or otherwise modified, if any, will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and other considerations. Historical Cash Flows The following table summarizes our sources and uses of cash for the six months endedJune 30, 2020 and 2019:
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